TRADES - Wednesday was a wild one, though it played out differently than I expected, with that early round of volatility pre Fed on the back of the soft US retail sales and CPI. Our newly established GBPNZD trade chopped around quite a bit before settling back around cost, while AUDNZD didn't do much at all. Of course, if that weren't enough Kiwi exposure, the post US data Dollar drop opened the door for a NZDUSD short position with intraday technical readings absurdly extended. It didn't hurt that NZDUSD was also back up at some important medium-term resistance levels, making the short even more attractive, especially with the Fed risk still hanging in the balance at the time. I had also sold some AUDUSD on the pre Fed move as well, but exited at cost ahead of the Fed (not wanting to be too exposed to correlated positions). In the end, the day ended with things pretty much the same with GBPNZD and AUDNZD, and a solid new short entry on NZDUSD, with the stop moved to cost to eliminate any risk on that trade.
REFLECTIONS - So what happened with the Fed decision? Well, it was an interesting one in my opinion and a move in the right direction. The Fed has been suffering from a credibility crisis for many years now as it has built a reputation for consistently backing down from forward guidance relating to policy reversal. And of course, with economic data slowing down in 2017, the market was and has been betting again the Fed will scale back and leave rates on hold for the remainder of the year, rather than hike one more time as it had signaled. And with Wednesday retail sales and inflation coming in soft, the market was salivating at the prospect the Fed would be unable to ignore these latest calls to hold off from being too aggressive on rate hikes. But the Fed surprised the market and held with its outlook for another hike this year, downplaying the slowdown in data and softer inflation readings, fully expecting both to pick up ahead, warranting the steady path of rate hikes and policy normalization.
REFRESHING - The Fed also added to its hawkishness by discussing balance sheet reduction in more detail, with plans to get going on this around the corner. And so, clearly the market reaction was appropriate considering it was looking for a more dovish reading. Now this doesn't mean the US Dollar will rocket higher and stocks will collapse going forward as the market will still look for any reason for the Fed to hold off on another hike this year. But it definitely should send a message the Fed really wants to be heading in a different direction now. This is a refreshing message from my perspective and something that has been long overdue. But it all feels a little weird, how all of a sudden the Fed is more confident about inflation picking up and more seriously committed to getting going with a shrinking of the balance sheet. Remember, earlier this week I highlighted some of this when I made the case the Fed would maintain its guidance. I also can't help but think about that bonus reason I offered which was that the Fed would be politically motivated to come out on the more hawkish side. Please read the report for more insight.
NEED TO WAIT NOW - Overall, I think it was an important decision for the Fed and one which showed maturity and responsibility to perhaps start leaning in a different direction that may not be as pretty at the outset, but offers a positive journey once it can fight through realities it has been ignoring for far too long. Strategically, I have been talking about looking to buy the US Dollar at some point soon, but I'm just not sure we're there yet, despite what was exactly the type of policy decision that should be propping the Buck and weighing on stocks. It just seems that the market will refuse to except any of what the Fed is saying as reality, once again looking for any excuse and opportunity to be selling the US Dollar and buying stocks, trends that have paid off handsomely in 2017.